The Monetary System in the International Arena - Coggle Diagram
The Monetary System in the International Arena
Large volume of international transactions take place in the global economy.
Different currencies complicates transactions
The foreign exchange market is where these transactions take place.
Banks and other financial institutions, consumers, business firms, and governments participate in it.
International transactions are not limited to the exchange of goods and services but also include flows of capital for lending or investment purpose.
Balance of Payments
The balance of payments is a summary statement of all transactions that take place between a country and the rest of the world during a given period of time
Main uses: To provide information regarding the demand and supply of foreign exchange
BP uses a double-entry system of bookkeeping. Transactions are recorded as debits and credits
The foreign Exchange Market
Different national currencies are bought and sold
The exchange rate is the price of one nation’s currency in terms of another’s.
Exchange rate is a relatiive price
an increase (decrease) in the exchange rate of the domestic currency means that its value has fallen (risen).
Demand and Supply Foreign Exchange
Exchange rate is a price
Exchange rates are set by the forces of demand and supply
the quantity of currency
demanded is the amount that people would buy in a specific time period
Equilibrium exchange rate is determined by the intersection of the demand and supply curves.
Purchasing Power Parity: Exchange rate volatility in the short run is largely due to capital movements as funds are shifted internationally
PPP theory holds that exchange rates between two currencies adjust to reflect differences in the price levels between the two countries.
exchange rate between two countries should equal the ratio of the two countries’ price level of a fixed basket of goods and service
Law of One Price
Absolute PPP, refers to the price levels between two countries
Relative PPP, the rate of depreciation (or appreciation) equals the difference in inflation rates between the two countries.
Echange Rate Regimes: basic exchange rate regimes have operated during the twentieth century: fixed exchange rates, flexible exchange rates, and managed exchange rates.
A fixed exchange rate is pegged at a certain level by the national mon- etary authorities and can only be changed by a government decision
Under a flexible or freely floating exchange rate system the monetary authorities do not intervene in the foreign exchange market.
The international monetary system can be seen as a network effecting international payments through institutions, rules, and regulations.